3rd India China Finance Conference

3rd India China Finance Conference Mumbai & New Delhi, India November 10-13, 2009

From Left to Right: Mr. Anil Bharadwaj (Secretary General, FISME); Mr. Abid Hussain (Chairman, ICEC Council); Mr. Ma Delun (Deputy Governer, People's Bank of China); Mr. Dinesh Rai (Secretay, MSME)

India China Cooperation in Financial Sector "We have got out of the winter, but we are not in the spring still" Ma Delun, Deputy Governor of People’s Bank of China ICFC 2009 India-China Financial Conference (ICFC) is an annual event organized alternatively in India and China by India China Economic and Cultural Council (ICEC Council) and China Society for Finance and Banking (CSFB). The event is keenly watched and participated by the top leadership from public and private financial institutions of both the countries. This year, the conference was held during 10 - 13 November 2009 in partnership with Indian Banks Association (IBA) in Mumbai and Federation of Indian Small and Medium Industries (FISME) in New Delhi.

The conference began with the welcome address by ICEC Council President, Mr. P.S. Deodhar. The conference covered a broad range of topics ranging from the impact of 9

the recent financial crisis on the economies of India and China, the climate for infrastructure finance, rural banking and micro finance to regulatory framework facing the banking, insurance and capital markets in India & China.

A consensus emerged that both the countries have faced the financial crisis with a limited impact on their economies because of their prudential banking regulations, distance from the severely affected western markets and culture of saving. Importantly, post the financial crisis, regulations that balance innovation and risks need to be implemented.

During the inaugural session, Dr. K Ramakrishnan, the Chief Executive of the Indian Banks Association, pointed that India-China trade was increasing year on year. The two countries have already surpassed their bilateral trade target INDIA-CHINA CHRONICLE Nov - Dec '09 - www.icec-council.org

of 2010 in 2009. But this year, the financial crisis has led to a 32 percent drop in bilateral trade, or about US$19 billion in the first half of the year, added Mr Ramakrishnan. He also mentioned that China’s imports from India are very concentrated and iron ore consists of 53% of total imports from India. Dr. Ramakrishnan also mentioned that bilateral trade between India & China had the potential to grow manifold especially in the areas of biotechnology, information technology, education, tourism, health and finance. He urged China’s banking officials to present how China can help in addressing India’s large infrastructure requirements.

The Chinese delegation comprising the Deputy Governor of People’s Bank of China (PBC), Mr. Ma Delun, Deputy Director General Research Bureau, PBC, Dr. Yi Cheng and the Deputy Counsel General of China in Mumbai, Mr. Li Xiangyang also expressed their appreciation at the growing trade and socio-cultural ties between India & China. Dr. Yi Cheng said he expected India-China trade to grow to US$60 billion by 2010, it has already surpassed US$51.8 billion in 2008.

Mr. Ma Delun assured the audience that India & China can get out of the abyss of the International financial crisis, "We have got out of the winter, but we are not in the spring still," he said. He also indicated that India and China could partner in many areas, including rural economic growth, where each country had expertise in certain aspects. While Mr Delun expressed scepticism over the US economy and its high unemployment rate, he said that China’s US$4 trillion stimulus package has helped the country clock a higher growth rate. From 6.8% in the fourth quarter of 2008, the economy grew by over 8.9% in the third quarter of 2009 and Mr. Delun said he was confident of an 8% growth for 2009.

On the sidelines of the conference and on the backdrop of rumours of pressure on the Chinese government to appreciate its currency "Yuan", Mr. Delun also said that the People’s Bank of China is contemplating a gradual liberalisation of its exchange rate. "Our exchange rate policy will have a better role in our balance of payments management," he was interpreted as having said.

Mr. Delun’s counterpart at the Reserve Bank of India, Ms. Shyamala Gopinath, the Deputy Governor of the Reserve Bank of India (RBI), said that due to India’s robust and prudent banking sector, the industrial sector is recovering and the economy had a limited impact due to the financial crisis. She said that while globally all countries should unite to seek a way out of the financial crisis and towards sustainable development; it was also the responsibility of each country to seek its own unique way forward. She expressed concern on the volatility of India’s capital flows and its impact on the financial stability of emerging economies like India. Last year the Indian market witnessed large-scale withdrawals by foreign institutional investors. However, from January this year, the FIIs have INDIA-CHINA CHRONICLE Nov - Dec '09 - www.icec-council.org

been net investors to the tune of US$13 billion. She also said that last year, for the first time since 1998, India’s capital account balance turned negative mainly due to net outflows under portfolio investment, banking capital and short-term trade credit. Mrs. Gopinath also expressed her concerns over rising inflation, food prices and lowered credit growth.

During the second session, 'Impact of financial crisis on Indian and Chinese banking and strategies with dealing with the crisis', Mr. Xiao Yuanqi, the Director General at the China Banking Regulatory Commission laid out a few best practices of Chinese banks followed by them in the year after the crisis. He said, all Chinese banks had a minimum capital adequacy ratio of 8%. The quality of capital was improving and profitability of banks was on the rise with Return on Equity (ROE) and Return on Assets (ROA). Banks exhibited transparency of information and that corporate governance had improved. Agreeing with Mr. Xiao, Mr. Yang Dongping, Chief Risk Officer, Bank of Communications added that countries needed to keep in check their macro regulations while maintaining a balance between profit and responsibility. They need to follow rules and market discipline and work with integrity. He also said that banks should innovate and spread their risks, however the key is to identify the balance between stability and innovation.

While expressing the Indian perspective, Dr. Rajiv Kumar, Director and Chief Executive Indian Council for Research on International Economic Relations (ICRIER), said that the financial crisis affected all aspects of the Indian economy including financial markets, exports and exchange rates and that all national regulatory authorities should work together to contain the spread of future risks.

Expressing the upturn in the economy, Mr Kumar said that gross non-performing assets (NPAs) have fallen over the last few years. NPAs accounted for 5.2% in 2004-05, they accounted for 2.3% in 2007-08. Net FII and FDI inflows were on the rise and the stock market had bounced back.

Similarly, liquidity in the market had increased and external commercial borrowings were down from US$4500 billion in March 2008 to US$100 billion in Aug 2009.

Another panellist in this session, Mr Venkattesh R of DCB added that India had not suffered a major set back from the financial crisis due to high saving rates, prudential policies, fiscal deficit being largely funded from internal savings, current account deficit accounting for 1-2% of the GDP. A gradual, focused and calibrated opening up of the economy and the domestic savings is being channelled into productive areas of growth in India.

During the third session on Rural Banking and Microfinance in India & China the delegates from both sides shared experiences of the importance of widening and deepening the scope of rural finance in both India and China. While both countries had a wide network of micro finance institutions and farmer schemes to service their

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rural populations banking needs, there are difficulties in controlling risks, offering banking services to a sparse population and better catering to the needs of the poor who didn’t have a banking history.

Mr. Change Yafeng, Head, Agricultural Finance Dept. of the Agricultural Bank of China said that credit flow to the rural areas of China had increased by 25% and that 35% of the farmers now had access to microfinance. He also said that rural banks had to explore various methods to help the poor. While farmer incomes had risen over the last few years, per capital income was still low.

During the fourth session on Infrastructure Finance in India & China Ms Liu Jingsheng, Managing Director, China International Capital Corporation Ltd. said China ranks 1st in ports capacity and it is constantly growing its railway, power and roads systems. China has 86,000 kms of railway second only to the US, 2 million kms of roads and produced 800 gig watt of power five times what it produced in 1949. Mrs Jingsheng expressed how China had expanded its infrastructure in a three tier system. She said that in the 1980’s the infrastructure sector grew on government investment, during the 1990’s, infrastructure was opened to foreign direct investment and in the 2000’s capital markets support infrastructure. She shared the strategies used by the Chinese government to attract FDI into China’s infrastructure sector in the 1990’s which helped propel the country. Ms Jingsheng said that China offered foreign investors a higher Return on Equity of 15% as compared to domestic investors which were offered 11%. This incentive helped pour money into ports, transportation, energy and city infrastructure, she added.

India's 11th financial plan outlays US$50 billion towards infrastructure and promotes public private partnerships to augment growth in the sector. The Indian delegates on the other hand stressed on the need for additional finances into the sector, competition between project developers to boost efficiency, the lack of co-ordination between the various agencies. Mr Rajagopalan, Chief General Manager, IIFCL, said that 85% of the projects are already being funded by the PPP model and that 113 projects have been sanctioned between 2006-09. He added that while reforms have been implemented in India’s infrastructure sector and 100% FDI is allowed, the sector continues to be riddled with problems and financial inefficiencies.

During the fifth and last session on Regulation on Banking, Insurance and Capital Markets, the Chinese delegates Mr. Xie Gong, Director General, Dept. of market Supervision at the China Securities Regulatory Commission laid down a few ground rules for the smooth functioning of the banking and capital markets. He advocated innovation of financial products, allowing micro finance to play a bigger role, promote the development of the bond market, and initiate small companies into the stock market. Mr. Meng Long, Director General, China Insurance Regulatory Commission stressed on the need to streamline the insurance sector in China's rural and agricultural sector.

Mr. Pei Chuanzhi, Vice President, China Foreign Exchange Trade systems added that the government should guide the market development and that one of the biggest challenges they faced would be to find a balance between regulations and innovations.

From Left to Right: Mr. P.S. Deodhar (Chairman, ICEC Council); Dr. K Ramakrishnan Chief Executive, Indian Banks Association); Ms. Shyamala Gopinath (Deputy Governer, Reserve Bank of India); Mr. Ma Delun (Deputy Governor, PBC); Dr. Yi Cheng (Deputy Director General Research Bureau, PBC); Mr. Li Xiangyang ( Deputy Counsel General of China in Mumbai) 11

INDIA-CHINA CHRONICLE Nov - Dec '09 - www.icec-council.org

Mr. Prashant Saran, Whole Time Member SEBI and Mr. Vijay Bhaskar, Chief General Manager, BBI stressed on the need for greater transparency and adopting international standards.

As part of the concluding session of the 3rd High Level India-China Finance Conference, a Roundtable Session was held in New Delhi on 13th November, 2009. The session was organized in association with The Roundtable Session today addressed financial issues facing Small & Medium Enterprises (SME’s) in India and China.

The Roundtable Session addressed financial issues facing Small & Medium Enterprises (SME’s) in India and China.

Dr. Abid Hussain, Chairman, ICEC; Mr. P. S. Deodhar, President, ICEC; Mr. Mohd. Saqib, Secretary General, ICEC; Mr. Sandip Ghose, Regional Director, Reserve Bank of India; Mr. Anil Bharadwaj, Secretary General, FISME; Mr. Dinesh Rai, Secretary, MSME; Mr. Paul Joseph, Principal Advisor, MCX; Mr. Arun Agarwal, President & Global Head (International Banking), Yes Bank and Mr. Ashwini Mehra Executive Vice President & Head, SBI were some of the prominent faces representing India. A twenty member delegation from China headed by Mr. Ma Delun, Deputy Governor of the People’s Bank of China was here on a week-long visit to India for the conference. The Deputy Governor was accompanied by senior officials from other Chinese regulatory bodies and financial institutions, such as Deputy Governor Mr. Ma Delun, Dr. Yi Cheng, Deputy Director General Research Bureau, PBC and Mr. Li Xiangyang the Deputy Counsel General of China in Mumbai.

Dr. Abid Hussain, Chairman, ICEC Council, in his opening remarks noted that, there are striking similarities & experiences in economic growth of India & China. He also added that, both countries need to work together to foster mutual confidence and alley fears.

Prof. Anwarul Hoda, Ex-Member, Planning Commission, pointed, that in view of the huge infrastructure finance deficit, India & China should consider strategies, to work together. Such cooperation will not only bring the investment but also the technology which China has used while developing its infrastructure.

Mr. Mohd. Saqib, Secretary General, ICEC Council, expressed that there were hiccups in getting the government to completely take on the responsibility of building roads and improving infrastructure and we had to work on the PPP model. He was very forthcoming and invited China to join hands with India and form an 'India-China Infrastructure fund' that would function as a guarantor for both the countries to trade in finance and technology enabling the growth of modern infrastructure in India.

Mr. MA Delun, Deputy Governor of the People's Bank of China, outlined the key areas of bilateral cooperation between India & China. SME Finance, Rural Banking & Infrastructure finance are the areas where the two countries can mutually benefit, he added.

Mr. P. S. Deodhar, President, ICEC Council, in his concluding remarks, highlighted the cultural similarities in India & China and placed high importance of continued dialogue between the two countries.

Mr. Dinesh Rai, Secretary, MSME, highlighted the role of entrepreneurs in pioneering the economic growth of the country. He stressed that the growth of the SME sector was very crucial since it provides a large employment base and were the roadmap for the future. There are several issues that SME’s faced which needed to be tackled and he identified them as – labour issues; quality; taxation and exim policy.

Chinese delegates expressed their appreciation at the growing trade and socio-cultural ties between India & China and shared that they expected India-China trade to grow to US$60 billion by 2010 (it has already surpassed US$51.8 billion in 2008).

Mr. Anil Bhardwaj, Secretary General, FISME, said that China has earned considerable experience in SME stock exchange. Innovative financial strategies have helped China to infuse equity in SMEs. In view of SEBI’s recent decision to allow SME stock exchange in India, the need of bilateral cooperation can be easily understood.

While both countries maintained that the financial crisis last year had a limited impact on their economies because of their prudential banking regulations, distance from the severely affected western markets and culture of saving they also agreed that post the financial crisis, regulations that balance innovation and risks needed implementation.

INDIA-CHINA CHRONICLE Nov - Dec '09 - www.icec-council.org

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